ACC 201 Lecture Note Four: Borrowing Costs (IAS 23)

**LECTURE NOTE FOUR** **BORROWING COSTS (IAS 23)** **BORROWING COSTS** IAS 23 Borrowing Costs In April 2001, the International Accounting Standards Board (Board) adopted IAS 23 Borrowing Costs, which had originally been issued by the International Accounting Standards Committee in December 1993....

**LECTURE NOTE FOUR** **BORROWING COSTS (IAS 23)** **BORROWING COSTS** IAS 23 Borrowing Costs In April 2001, the International Accounting Standards Board (Board) adopted IAS 23 Borrowing Costs, which had originally been issued by the International Accounting Standards Committee in December 1993. IAS 23 Borrowing Costs replaced IAS 23 Capitalisation of Borrowing Costs (issued in March 1984). In March 2007 the Board issued a revised IAS 23 that eliminated the option of immediate recognition of borrowing costs as an expense. **CORE PRINCIPLE** Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognized as an expense. Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Borrowing costs may include: \(a) Interest expense calculated using the effective interest method as described in IFRS 9; \(b) Interest in respect of lease liabilities recognized in accordance with IFRS 16 Leases; and \(c) Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Depending on the circumstances, any of the following may be qualifying assets a. inventories (b) manufacturing plants (c) power generation facilities (d) intangible assets (e) investment properties (f) bearer plants. **RECOGNITION** An entity shall capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. An entity shall recognize other borrowing costs as an expense in the period in which it incurs them. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are included in the cost of that asset. Such borrowing costs are capitalized as part of the cost of the asset when it is probable that they will result in future economic benefits to the entity and the costs can be measured reliably. When an entity applies IAS 29 Financial Reporting in Hyperinflationary Economies, it recognizes as an expense the part of borrowing costs that compensates for inflation during the same period. **BORROWING COSTS ELIGIBLE FOR CAPITALIZATION** 1.The borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are those borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made. When an entity borrows funds specifically for the purpose of obtaining a particular qualifying asset, the borrowing costs that directly relate to that qualifying asset can be readily identified 2\. To the extent that an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalisation as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. 3\. The financing arrangements for a qualifying asset may result in an entity obtaining borrowed funds and incurring associated borrowing costs before some or all of the funds are used for expenditures on the qualifying asset. In such circumstances, the funds are often temporarily invested pending their expenditure on the qualifying asset. In determining the amount of borrowing costs eligible for capitalization during a period, any investment income earned on such funds is deducted from the borrowing costs incurred. 4\. To the extent that an entity borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalisation by applying a capitalization rate to the expenditures on that asset. 5\. In some circumstances, it is appropriate to include all borrowings of the parent and its subsidiaries when computing a weighted average of the borrowing costs; in other circumstances, it is appropriate for each subsidiary to use a weighted average of the borrowing costs applicable to its own borrowings. **COMMENCEMENT OF CAPITALIZATION** An entity shall begin capitalizing borrowing costs as part of the cost of a qualifying asset on the commencement date. The commencement date for capitalization is the date when the entity first meets all of the following conditions: \(a) it incurs expenditures for the asset; \(b) it incurs borrowing costs; and \(c) it undertakes activities that are necessary to prepare the asset for its intended use or sale. **CESSATION OF CAPITALISATION** - An entity shall cease capitalizing borrowing costs when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. - When an entity completes the construction of a qualifying asset in parts and each part is capable of being used while construction continues on other parts, the entity shall cease capitalising borrowing costs when it completes substantially all the activities necessary to prepare that part for its intended use or sale **DISCLOSURE** An entity shall disclose: \(a) the amount of borrowing costs capitalized during the period; and \(b) the capitalization rate used to determine the amount of borrowing costs eligible for capitalization.